Financial Turmoil in Europe

Over the pond, in Europe, things are not looking too good. The Brexit referendum seems to have unleashed a whole host of problems in an already unstable financial environment.

In Britain, Mark Carney, Governor of the Bank of England, gave a speech on Tuesday – his third since the referendum, – trying to reasure investors, yet again, that he will do everything that is necessary to stimulate the economy. Among the measures he had already promised to implement is an additional cut to the already low interest rate of the Bank of England, currently standing at 0.5%. The latest measure he introduced: the release of £150 billion for loans, available for households and businesses.

Despite all measures introduced by Mr Carney, the British pound is still at a historic low, the shares of British banks have fallen by a whopping 20%, and business investors are desperately trying to withdraw any and all investments they hold in British property funds – so much so that three of the most important such funds have already halted trading and have barred investors from withdrawing their cash! But do not worry, everything is under control – whatever had not already been fixed by money printing, cheap loans and low interest rates (already at zero in many countries around the world), will most certainly be fixed by a lot more money printing, cheap loans and negative interest rates, right?

European stock markets rallied on Thursday after three consecutive days of falling. They were led by companies such as Danone, which announced a major acquisition. As a result of the announced merger, worth $12.5 billion, Danon’s stock price jumped by 7% today alone. This is one of the reasons stock markets around the world have not fallen as much – mergers, acquisitions and stock buy-backs.

According to TheStreet.com, the reason for today’s rally in European stocks were the minutes of the Federal Reserve June meeting, released yesterday. The same website, in a different article, blamed the same Fed minutes for the fall of the stockmarkets in Asia. No comment needed.

Bank stocks throughout Europe, however, continue to fall, showing the main reason for concern – overleveraged banks.

Among the most important concerns is the precarious situation of the Italian banks. The values of Italian bank stocks have been plumetting for the better part of this year. Italian banks are holding enormous amounts of bad debts – non-performing loans amount to a total of about $350 billion dollars. Among fears of bank runs, bailouts and downgrades, the bad loans in Italy are about 17% of all loans – three times higher than the bad loans in the US that started the subprime mortgage crisis and the Great Recession. Italy has the third largest economy in Europe, the eight largest in the world. An Italian banking crisis will have a ripple effect aroud the world.

If this is not enough, Deutsche Bank also seems to be in trouble. The bank’s stock fell to a record low, and traders are already betting on another major plunge in the bank’s value. A week ago, even the International Monetary Fund warned about Deutsche Bank being the riskiest of all “too big to fail” banks, as most exposed to derivatives and currently trading on the markets far below what it is supposedly worth – significantly lower than other major banks aroud the world.

And even the big banks in the US now agree that there may be trouble ahead – three of them, including Goldman Sachs, are recomending that investors stay away from the stock market. And this is only the beginning, a few facts out of a myriad more, all of them “symptoms” of what is to come.

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